Commentary and Tracking of a Portfolio of Stocks using approach from "The Little Book that Beats the Market" by Joel Greenblatt aka Magic Formula Investing

Saturday, March 15, 2014

Ranking My Tracking

A week ago, we had a discussion on my blog about alternative ways to identify the "best" stocks on the MFI lists. I have shown that since 2006, you have been much better off going with dividend stocks (yields of 2.6% or greater) and that you have been better off staying away from the small stuff, say $800 million and lower in market cap.

The question was asked about ranking. I do create a top 200 list every month or so and I do rank the top 50 official stocks when I do that. So if you picked the top 5 or top 10 from my ranking would you do "better"?

Difficult question to answer. I think the biggest issue is the data. I only have data going back to July 2011. It has been a steady upmarket since then and MFI has done well. In addition, in the entire market the Russell 2000 Index (smaller stocks) has done very well. So I would argue the data may have some bias. Then it is always a bit messy to do back tests. I have some decent tools, but I always worry if I am capturing special dividends, stock splits, name changes, buy outs etc etc etc. I do the best I can, but I do have a day job.

So with those caveats, here is a table I created. It has about 23 or 24 portfolios going back to July 2011:

Rank

Pct Change

Rolling Five

Rolling
Ten

1

15.4%

2

17.0%

3

25.1%

4

12.6%

5

16.0%

17.2%

6

26.7%

19.5%

7

20.2%

20.1%

8

17.9%

18.7%

9

40.2%

24.2%

10

41.2%

29.3%

23.2%

11

32.5%

30.4%

24.9%

12

52.3%

36.8%

28.5%

13

12.6%

35.8%

27.2%

14

35.0%

34.7%

29.5%

15

17.2%

29.9%

29.6%

16

33.5%

30.1%

30.3%

17

22.1%

24.1%

30.5%

18

28.4%

27.2%

31.5%

19

20.1%

24.3%

29.5%

20

19.4%

24.7%

27.3%

21

36.0%

25.2%

27.6%

22

32.0%

27.2%

25.6%

23

40.5%

29.6%

28.4%

24

9.3%

27.4%

25.8%

25

31.6%

29.9%

27.3%

26

9.9%

24.7%

24.9%

27

22.1%

22.7%

24.9%

28

9.8%

16.5%

23.1%

29

17.6%

18.2%

22.8%

30

22.1%

16.3%

23.1%

31

33.1%

20.9%

22.8%

32

25.3%

21.6%

22.1%

33

29.1%

25.4%

21.0%

34

19.4%

25.8%

22.0%

35

19.3%

25.2%

20.8%

36

12.3%

21.0%

21.0%

37

20.2%

20.0%

20.8%

38

28.7%

20.0%

22.7%

39

12.2%

18.5%

22.2%

40

18.4%

18.4%

21.8%

41

11.6%

18.2%

19.6%

42

14.1%

17.0%

18.5%

43

24.5%

16.2%

18.1%

44

22.1%

18.2%

18.3%

45

18.4%

18.2%

18.3%

46

13.1%

18.4%

18.3%

47

26.1%

20.8%

18.9%

48

21.4%

20.2%

18.2%

49

17.1%

19.2%

18.7%

50

11.0%

17.7%

17.9%

Grand Total

22.7%

22.7%

22.7%

Now you can see that the average stocks has gone up 22.7% (generally a year). As I emntioned, this has been a real bull stretch. For whatever reason, the #9, #10 and #12 slots have done very well. Do I think there is something magical about being #12 on the list? No. Here are all the #12 stocks

Date

Stock

Initial Price

End Price

Percent Change

Mkt Cap

Rank

EY

ROIC

8/16/2013

UIS

24.25

33.06

36%

1,060

17

18.3%

123.7%

7/12/2013

HLF

48.36

66.16

37%

5,050

16

12.6%

267.1%

6/28/2013

AUXL

16.63

29.72

79%

820

17

12.6%

244.0%

5/31/2013

DLX

36.78

52.25

42%

1,896

16

12.5%

307.1%

4/19/2013

CPLA

30.18

65.43

117%

376

20

21.3%

131.7%

3/11/2013

RTN

54.61

100.73

84%

18,378

23

15.2%

151.9%

2/1/2013

AAPL

429.1

500.6

17%

425,937

18

13.7%

357.4%

12/7/2012

LPS

24.11

35.11

46%

2,066

21

14.4%

390.9%

9/21/2012

WCRX

12.56

22.93

83%

3,256

20

13.9%

421.0%

9/21/2012

VG

2.4

3.01

25%

544

21

16.0%

162.1%

8/17/2012

GME

17.61

47.05

167%

2,312

22

27.3%

105.1%

7/21/2011

SCEI

2.27

1.02

-55%

53

15

--

159.2%

7/9/2012

UIS

18.22

24.02

32%

856

19

34.4%

179.7%

5/4/2012

CPLA

32.98

36

9%

411

20

27.2%

159.7%

3/23/2012

VECO

30.35

38.41

27%

1,137

21

42.9%

150.3%

2/24/2012

ASTX

1.96

3.1

58%

189

24

21.8%

184.3%

1/29/2012

CHKE

10.28

14

36%

123

21

16.4%

377.4%

12/21/2011

UIS

20.27

17.3

-15%

14,887

20

26.7%

167.9%

12/8/2011

ACAD

1.05

4.55

333%

53

21

15.7%

2177.3%

11/3/2011

CPLA

36.62

31.74

-13%

446

22

23.8%

189.6%

8/26/2011

CPLA

30.17

35.32

17%

453

19

31.3%

209.6%

8/26/2011

MNTA

16.35

14.41

-12%

832

18

32.0%

212.0%

So you can see that the results here were a bit distorted by ACAD running from $1.05 to $4.55 (I looked and it is $26 now!). My view in looking at the data overall is that there does seem to be a case made for staying away from #41 to #50. But the first 40, I do not see a pattern.

By Earning Yield

My second cut of the data was by earnings yield. We just showed that overall rank within the top 50 did not seem to matter, except in the bottom 10 (perhaps). How about if you are one of the higher Earnings Yield stock (ignoring return on capital)? Recall earnings yield is kind of the inverse of price to earnings ratio.

Earning Yield Decile

Avg
% Chg

1

27%

2

41%

3

32%

4

30%

5

23%

6

19%

7

19%

8

14%

9

15%

10

11%

Grand Total

23%

This is a bit more interesting. This seems to be a descending pattern. A "10" are the 10% of stocks with the highest earnings yields. So it appears that these may be the classic value traps from time to time. Meanwhile, the lower earnings yields (recall they are still good) actually do better. The #10 slot had stocks like ASYS, CECO, ESI and NSU that dampened their results. So the moral here is that we do want to buy "cheap" companies, but if they are the cheapest of the cheap - we may need to kick the tires a little harder.

By ROIC

Same exercise, now looking at ROIC by decile.

ROIC Decile

Avg
% Chg

1

14%

2

10%

3

41%

4

32%

5

29%

6

27%

7

0%

8

24%

9

21%

10

33%

Grand Total

23%

This one seemed a little more random. Not sure I see anything. Obviously the #7 stands out. For whatever reason, that decile got a lot of the APOL and ESI types that did poorly for a chunk of the period we're looking at.

Conclusion

While I did have two "findings": the bottom 10 in the top 50 appear to be the worst performers and that the very highest earning yield stocks appear to under perform as well; I would call these directional at this point. After another year or two, I can follow up with a little more data and we will see what we will see.